In an interview to the Wall Street Journal (WSJ) in mid-2016, Prime Minister Narendra Modi repeated his favourite maxim, “minimum government, maximum governance.”
He specifically went on to state, “in a developing economy, state enterprises do have a role in some sectors. They have to be managed professionally and efficiently. We have given them operational freedom and brought in talent from the private sector as well to facilitate this.”
Considering that the NDA government had until that point largely remained inactive when it came to reforming India’s central public sector enterprises (CPSEs), these statements kindled a hope, though belated, among all those who expected the CPSEs to become professional, efficient and functionally autonomous. There was hope that CPSEs could eventually set optimal benchmarks of performance for the private sector and create a competitive environment conducive to economic efficiency. There was also an all-round expectation that Modi would indeed come up with a “surgical strike” at CPSE reform that would, in his own words, “reform, perform and transform” governance.
The measures taken by the government since then have belied that hope. It has been business as usual for the CPSEs or even worse.
During the first two years of its coming to power, the NDA government went about with a clinical precision, replacing the independent directors of several CPSEs and in the process, raising apprehensions about the decision’s underlying motives. One glaring and questionable intervention made by the NDA government was in the case of the Oil and Natural Gas Corporation (ONGC), which was more or less strong-armed into acquiring a sizeable share of Gujarat State Petroleum Corporation (GSPC), a state enterprise that was indicted by the Comptroller and Auditor General of India (CAG) for taking a series of dubious investment decisions that drove it into a debt trap. There is no doubt that the acquisition of a stake in GSPC hurt ONGC’s finances and its credibility as a ‘Maharatna’ company.
Keshav Dev Malaviya, a political visionary of a rare kind who presided over the Ministry of Natural Resources (later became Ministry of Petroleum and Natural Gas) founded ONGC as a CPSE in 1956. He was undoubtedly the father of the domestic petroleum industry in the country. He considered ONGC a symbol of self-reliance in hydrocarbon development and a bulwark against foreign oil companies that dominated the sector till they were nationalised during the 1970s. He perceived ONGC as a professional institution par excellence and would never have dreamed of it becoming an institution affected by political patronage and manoeuvring as seems to be the case today.
A year after Modi’s prophetic interview with the WSJ, his government took the patently retrograde step of nominating BJP spokespersons and party workers as non-official directors of eleven odd CPSEs, many of which are ‘Maharatna’ and ‘Navaratna’ companies, which are expected to have a great deal of functional autonomy and be managed by professionals with experience.
These include ONGC (Sambit Patra), Engineers India Ltd (Shazia Ilmi), Cotton Corporation of India Ltd (Rajika Kacheria), Hindustan Petroleum Corporation Ltd (Asifa Khan), Bharat Heavy Electricals Ltd (Surama Padhy), Bharat Petroleum Corporation Ltd (Tamilisai Sounderarajan), State Trading Corporation (Bharatsinh Prabhatsinh Parmar), Export Credit Guarantee Corporation Ltd (S. Malathi Rani), Andrew Yule & Company Ltd (Sipra Goon), National Handloom Development Corporation Ltd (Shikha Roy) and National Aluminium Company Ltd (K.G. Sinha).
No doubt, the credentials of each one of these persons are prima facie unimpeachable. However, the question that begs to be asked is to what extent will they be able to add value to the management of the CPSEs?
Tit for tat
One could argue that the government in power is well within its right to nominate any person as a director of a CPSE and there is nothing wrong in nominating a person the government thinks fit to discharge that function. After all, such a practice was also followed occasionally by the previous UPA government and, therefore, there is no reason why the present NDA government should take the high road.
To test the efficacy of this argument, one must consider Section 166 of the Companies Act which defines the responsibilities of a director of any company; whether he or she is a “functional”, “independent” or“non-official” director. This section expects a director to “act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment”. It also expects that the director will “exercise his duties with due and reasonable care, skill and diligence and shall exercise independent judgment”. Crucially, the director should “not involve in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company.”
This section requires the government to nominate any person who fulfills these criteria. While it no doubt provides a great deal of discretion, such a discretion cannot evidently be arbitrary and injudicious. The discretion so provided in the Companies Act enables the government to nominate persons who have sufficient domain knowledge relevant to the operations of a given CPSE.
In its 1998 manifesto, the BJP, led by Atal Bihari Vajpayee, committed itself to managing the public sector “professionally”, “with least interference by government”. It was then that guidelines were issued to discourage the nomination of political party representatives to CPSE boards. Accordingly, on February 15, 2009, the department of public enterprises (DPE) advised all ministries that “non-official directors are to be drawn from the public men (sic), technocrats, management experts and consultants, and professional managers in industry and trade with a high degree of proven ability.”
The guidelines on CPSEs issued by the DPE in August 2015 as well as those issued by the department of personnel and administrative reforms in February, 2017, unanimously stipulate that persons nominated as non-official directors of CPSEs should be “professionals of repute having more than 15 years of relevant domain experience in fields relevant to the company’s area of operation”, “persons of eminence with proven track record from industry, business or agriculture or management.”
The decision taken now by the government to nominate BJP workers as non-official directors clearly makes a mockery of the BJP’s own manifesto of 1998 cited above and the guidelines issued more recently by the NDA government itself.
What does a director do?
The role of a director nominated by the government to be on a CPSE board is somewhat complex. Does he or she safeguard the commercial interests of the CPSE itself or the interests of the government that nominated him or her to represent it? To strike a balance between these two objectives, which sometimes could come in conflict, is not an easy task. Lord Denning, probably the greatest English judge of modern times, famously said, “there is nothing wrong with a director being nominated by a shareholder to represent his interests, so long as the director is left free to exercise his best judgment in the interests of the company which he serves. But if he is put upon terms that he is bound to act in the affairs of the company in accordance with the directions of his patron, it is beyond doubt unlawful.”
In the instant case, the BJP worker has apparently two patrons, not one. Should he or she be answerable to the government or to the BJP, a party to which he or she belongs and apparently owes his or her nomination to that party? This introduces a third dimension of complexity that creates a greater scope for conflict of interest. Some of these nominee directors are also active spokespersons for the BJP on television. Would that role not run counter to their role as CPSE directors? Do they have sufficient domain knowledge that enables them to provide meaningful inputs to the management?
ONGC’s recent decision to acquire a stake in GSPC is a case in point. A nominee director in compliance with the obligations cast on him or her by Section 166 would have resisted the move of the government to force ONGC to agree to such an acquisition which is neither beneficial to the company nor in the overall public interest. However, the decision that ONGC should acquire a sizable stake in GSPC is one that is apparently imposed on the company by those whose primary objective was to bail out GSPC and obfuscate its shortcomings. A nominee director on the board of ONGC would have found it difficult to resist the extraneous pressure exerted by those trying to push through the deal at any cost.
It is not just the CPSEs which have been at the receiving end of such political interference. There seems to be an attempt to induct party workers into several statutory bodies. For example, it was reported that the present government had tried to appoint a BJP worker as a member of the National Human Rights Commission (NHRC) and it would have gone ahead with that move but for a PIL filed before the apex court.
If Modi is earnest about reforming the CPSEs, he should distance the government and his party from them, encourage professional management, competition and public accountability. CPSEs have a crucial role to play in nation building for decades to come and any tinkering with their management is likely to hurt the economy.
Slogans such as “Minimum Government, Maximum Governance” and “Reform, Perform and Transform” are laudable, easy to articulate but difficult to translate into tangible action. Intentions underlying such slogans are more important than the spoken words. Intentions will mean nothing, unless they get translated into genuine action. As the gap between words and deeds widens, the credibility of sloganeering will get eroded, a situation that any prudent leader should be wary about.
E.A.S. Sarma is former secretary, Ministry of Power, government of India.